WINDERMERE, Fla. (Stockpickr) -- Usually when I write a breakout stocks article I focus on stocks from a number of different sectors that look poised for some breakout action.
However, for this week's edition, one sector is looking so ripe for breakouts that I am going to focus on names only involved in this hot space. That sector is agriculture, otherwise known as the ag stocks.
The ag sector has so many great catalysts going for it that it's hard to make a bearish argument against it. One
catalyst is the fact that the world is filled with food shortages and the global population is skyrocketing, a dangerous combination that's creating the perfect storm for the ag stocks. China and India are growing so fast that these two countries alone could
for some time to come.
Let's also not forget that ag stocks are benefiting tremendously from all the quantitative easing that's been happening on Wall Street. Whether or not you agree with the
actions, the market is starting to see all of this dollar-printing and currency debasement as inflationary. That perceived inflationary action by the Fed is pushing commodity prices up like there's no tomorrow. It's also pushing the price of precious metals into the stratosphere.
Just take a look at the performance of soft commodities such as corn, wheat and coffee, which are all up around 50% so far this year. Cotton has done even better, trading up almost 100% in 2010. The formula here is very simple: Take
due to population growth, combine it with the recovery in leading global economies, then sprinkle in a little weak dollar, and commodity prices are sent through the roof.
How long will this last? I can't say for sure, but I do know that as long as large speculators continue to buy commodities and as long as ETFs designed to game these markets are in demand, then the prices will continue to go up if the catalysts remain in place. These upward prices will cause a ton of breakouts that will be worth trading for the chance to make some big profits.
Trading breakouts is not a new game on Wall Street. This strategy has been pioneered by legendary traders such as William O'Neal, Stan Weinstein and Nicolas Darvas. A breakout occurs when a stock makes a move through a significant level of support or resistance, which is usually followed by heavy volume and increased volatility. Wall Street players love to see an upside breakout because it demonstrates strength in the underlying asset as the price breaks above a level of previous resistance. An upside breakout can also take a stock to new highs, which will generate a lot of interest as the stock shows up on sophisticated software that scans for this type of action.
Here's a look at a number of solid
that could have big upside potential.
One ag stock that looks poised to break out very soon is
, a retailer of ag products and services in the U.S., Argentina, Chile and Uruguay and a global producer and wholesale marketer of nutriments for ag and industrial markets. This stock hasn't put in a huge 2010 in terms of performance, but shares are sill up around 44% year-to-date.
If you take a look at the chart I have provided for Agrium, you'll see that the stock is approaching some key previous overhead resistance at around $89.60 a share. The last time the stock traded around this level was back in early November. Since that time, the stock has been trading in range between the low $70s and high $80s. Now Agrium looks poised to break out above the upper end of that trading range with a move above $89.60. This breakout, if it does indeed happen, would be a big deal because it would mean the stock wasn't held below that previous resistance level at $89.60 for very long by the bears or sellers of the stock.
Whenever I see a stock that trades back toward a high that it has previously failed at in a short time frame like we have here with Agrium, it increases the probability of a breakout above that previous high. What this really tells me is that the trend is Agrium is up and the bulls are about to win a major victory if they can push the stock into breakout territory.
So what type of volume should traders look for to confirm the breakout? I would suggest that investors in Agrium watch for volume that is well above the three-month average trading volume of 1.8 million shares. The higher the volume is above that three-month average action where Agrium breakouts, then the higher the probability that the stock will continue higher. Remember to watch for the volume and the breakout to form on a closing basis for the stock, and not just an intraday move.
If we get that bullish conformation on a closing basis, then my take is that Agrium is heading towards $100 a share which is the closest psychological level for the stock to hit in the near term. If the stock clears $100 a share, then I would look for a test of the all-time high on Agrium which sits at around $110 a share.
named Agrium one of the
Another ag stock that market players should put on their radar is
, a producer and marketer of concentrated phosphate and potash crop nutrients for the global agriculture industry. Even though Mosaic is near a key breakout point, the stock hasn't done much in 2010 with shares up only around 23%.
If you take a look at the chart for Mosaic, you'll see that shares are quickly approaching a major breakout around $74.25 a share. That $74.25 area is the previous
on the stock, and it's a major overhead resistance level that would now be a key breakout point. Like Agrium, Mosaic has also been trading in a well-defined range, between around $63 and $74 a share, for the past couple of months. And like with Agrium, the bears on Mosaic haven't been able to hold the price down for long now that MOS is quickly approaching a breakout above that previous high.
Market players should now watch for volume on any breakout above $74.25 to register well above the three-month average action of 4.6 million shares. It doesn't look like the volume is going to hit that level today if the stock does in fact close above the breakout level, so watch for volume to follow through in the next few days that's well above that 4.6 million. If we don't get that volume, it doesn't mean the stock can't go higher, but it does mean the probability of it going higher decreases.
The next area of major resistance on the stock sits at around $90 to $95 a share. That's a far from the current levels around $74 a share, so investors should keep Mosaic on their trading radar for the foreseeable future if the stock does indeed breakout.
Mosaic, another of
, is owned by
, comprising 3.2% of the total portfolio as of the latest filing.
One more ag stock that is very speculative but could be worth the risk for a breakout play is
( FEED), which is engaged in the animal nutrition and commercial hog-producing business in the People's Republic of China through its indirect operating subsidiaries. This stock hasn't done well in 2010, with shares off over 47%, but that could be about to change now that the chart is starting to show some signs of life.
If you take a look at the chart for AgFeed, you'll see that the stock has found some solid support at around $2.30 to $2.40 a share during the past number of weeks. The stock is now attempting to form a breakout above the lower end of a large gap down in price that occurred in early Nov. from $3.40 to around $2.70 a share. This breakout would be very significant because it would mean that AgFeed could make a run at filling that big gap down, plus it would mean the stock is about to clear even more previous resistance below that gap at around $2.60 to $2.65 a share.
If AgFeed does break out above $2.65 and $2.70 a share, then I think the stock will fill that gap and trade all the way back toward the upper range of the gap at $3.40 a share. The biggest reason I like the chances for this breakout and gap fill are due to the big volume that's starting to come into the stock during the past couple of trading sessions. On Tuesday, over 1.5 million shares traded hands (as the stock closed up) versus the average three-month volume of around 775,000 shares, and just today we already have over a million shares trading with the stock up a very modest 0.2%.
Keep in mind that over 10.9% of the float for AgFeed is currently sold short by the bears. This means that out of the 39 million shares in the tradable float, around 4.05 million are sold short. This is a situation where the float is small and the short interest is high enough to spark a very large
if the bulls can take back control of the stock.
To see more breakout action in ag stocks such as
, check out the
portfolio on Stockpickr.
-- Written by Roberto Pedone in Winderemere, Fla.
Follow Stockpickr on
and become a fan on
At the time of publication, author had no positions in stocks mentioned.
Roberto Pedone, based out of Windermere, Fla., is an independent trader who focuses on stocks, options, futures, commodities and currencies. He is also an outside contributor to Beconequity.com and maintains the website Maddmoney.net, which he sold to Blue Wave Advisors in 2008. Roberto studied International Business at The Milwaukee School of Engineering, and he spent a year overseas studying business in Lubeck, Germany.